The U.S. Commerce Department today reported a mere 0.5 percent seasonally adjusted annualized rate of economic growth in the first quarter, the worst showing in the last two years. True enough, the first quarters of both 2014 and 2015 were weak too.
But economic weakness of late has likely factored into the Federal Open Market Committee (FOMC) announcement yesterday. The Fed, at its regularly scheduled policy meeting, decided that it would hold interest rates at their current level. “Information received since the Federal Open Market Committee met in March indicates that labor market conditions have improved further even as growth in economic activity appears to have slowed,” the FOMC statement said. Read more about Surprising No One, the Fed Doesn’t Make a Move 04-28-16
So far, this earnings season has been good for the U.S. equities. Yesterday, stocks in the U.S. rose to the highest level this year (as measured by the Standard & Poor’s 500 Index).
After today, shares are down by less than 2 percent from the record-close number, too. Reduced expectations for the Fed hike this year also helped the improved market sentiment. In terms of earnings, we are still early in the season. Analysts expect the S&P 500 earnings to decline as much as 7.5 percent in the first quarter.
A rebound in the price of oil accounts for the recent strength in the energy sector; Signs that the Chinese economy isn’t in a bad shape have also helped.
Read more about Stocks Try to Sustain Momentum 04-21-16
We are in the beginning of a new earnings season, and going forward equities will likely see plenty of reasons to fluctuate. So far, stocks in the U.S. increased this week, on quarterly reports and also encouraged by the China’s 11.5 percent year-over-year increase in its dollar-denominated exports last month. The China data was better than expected.
In its quarterly update to the World Economic Outlook, however, the International Monetary Fund (IMF) cites slow global growth; the IMF cut respective forecasts for 2016 and 2017 to 3.2 percent and 3.5 percent, down from its the forecasts in January of 3.4 percent and 3.6 percent respectively.
Read more about Inflation Trends and the Fed 04-14-16
After a see-saw action of the past week, shares are about one percent lower from their closing price at the quarter-end. We attribute the action to the mix of optimism and pessimism; both were clearly present and almost palpable.
The market sold off when growth fears dominated and moved higher when signs of growth were more obvious. We saw signs of strength in the U.S. economy after the Institute for Supply Management (ISM) announced the reading of its non-manufacturing index for March. The reading of 54.5 indicates expansion, and it was also up from 53.4 in February and a few decimal points ahead of expectations. This also followed a period of five months that saw no increase at all. The ISM manufacturing report also indicated expansion.
That does not mean, however, that the U.S. Federal Reserve will raise rates again this month. Read more about Stocks on a Roller Coaster Ride 04-07-16
U.S. stocks and Treasuries both increased this week, and the dollar declined, after remarks from Federal Reserve Chair Janet Yellen, which blunted the hawkish comments from other Fed officials, albeit non-voting ones, last week.
“I consider it appropriate for the committee to proceed cautiously in adjusting policy,” Yellen said in her Tuesday remarks to the Economic Club of New York. “This caution is especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”
She made these comments a week after two Fed officials suggested in their speeches that the Fed could raise rates again as soon as April—because the economy can sustain the hike. Janet Yellen, however, is Chair, and her tack is cautious. Read more about Upwards and Onwards 03-31-16